Cookies

This website uses cookies to give you the best possible experience. By continuing to use our website you are giving consent to cookies being used. For more information about cookies and how to disable them, please read our Privacy and Cookie policy.

Share

Like an unreliable boyfriend, Bank of England Governor Mark Carney is all talk and no action.

In the immortal words of Labour MP Pat McFadden from 2014, he’s hot, then cold, and investors don’t know where they stand.

Mr Carney’s latest monetary policy statement was much more aggressive than we have seen for some time and it sent gilt markets and their derivatives staggering. Essentially, he said the UK economy was doing better than expected and that employment conditions were bright. His conclusion was that if the current environment persisted the bank would need to tighten monetary policy faster than the market expects.

We agree that the market has been expecting steady interest rates to continue much longer than seemed likely, yet now seems an odd time to cheer the state of the British economy. We have been a little dubious of Mr Carney’s credibility for some years now and this latest episode seems just another example of his bank jumping from hawkishness to dovishness and back again.

Still, like a desperate suitor, the gilt market keeps listening to him.

Following the Brexit vote, the UK economy was actually humming along ok. But Mr Carney halved the benchmark interest rate to 0.25%, restarted quantitative easing (QE) and put up £100bn of cheap funding for banks. It’s true that the vote caused much uncertainty, but the amount of stimulus Mr Carney injected into the financial system was extraordinary. He continued to be cautious and brooding about the potential for a downturn, despite generally positive data and little sign of financial dislocation or corporate unrest. Because of this, investors decided that UK interest rates wouldn’t rise till at least the first quarter of 2019. Well, that’s what buying and selling on the swaps markets implied anyway. We felt that was way too pessimistic – so did many other people – but that’s what the weight of money said.

Now, after months of worry and warnings, Mr Carney abruptly changed his tune. But, strangely, at a time when economic data are actually looking a bit wobbly. Markets responded with the financial equivalent of a handbrake turn. Now, instead of expecting a 0.25% rate hike in 15 to 18 months, the next rate rise is forecast for December this year.

Even if this 25-basis-point rise goes ahead, the UK’s monetary policy will remain much looser – and supportive to the economy – than it was before the Brexit vote. That’s because of the continuing effects of QE and the roughly 11% fall in sterling since the referendum, which is similar in effect to a fall in interest rates. A good thing too, as economic growth has dipped lately and real wages are still badly squeezed which is hurting consumption. It could be that Mr Carney is talking tough in an attempt to bolster sterling. The currency weakness, while helpful for monetary conditions, has been spurring inflation higher, eating into the purchasing power of UK consumers. At writing, CPI was 2.9%, while RPI was almost 4%. The BoE is in a bind: it needs to keep rates low to avoid strangling modest GDP growth but inflation has been above its 2% target for seven months and counting.

Our head of asset allocation research, Ed Smith, has been investigating how inflation is likely to be affected by demographics, globalisation and technological progress over the longer term. We will be publishing a report on his findings in the next month or so.

As for what will happen over the next year or so, we believe inflation should peak this quarter. The domestic inflationary pressures that the BoE follows are levelling off, significantly greater jobs growth is likely to be stifled by skill mismatches, while those jobs where the supply of labour is tightest are in typically low-paying industries. This will be good for income inequality figures, but it is unlikely to push the headline average wage higher.

The question is: does Mr Carney need to curtail inflation more than he needs to support economic growth? We think the answer is no. History shows the BoE usually errs on the side of caution with its interest rate policy, and we see no reason why this time should be any different.

Investors should probably spend less time fretting over Mr Carney’s harsh words. He’s probably just playing for time.

Share

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.